Even short-term FHA shutdown will hit housing

FHA shutdown would hit first-time home buyers the hardest. Even a short-term FHA shutdown could dent confidence in the real estate market.

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    In this file photo taken Sept. 16, 2010, KB Home townhouses are shown for sale in Redwood City, Calif. Publicly traded home builders like KB Home depend heavily on the Federal Housing Administration making loans to buyers of their homes, which will slow to a stop if there's a government shutdown.
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By Diana Olick, CNBC real estate reporter

I was hoping not to have to write this particular piece, but it seems I may have no choice, so here we go with housing.

What happens to today's housing market without FHA loans?

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Right now FHA loans are about 20 percent of the overall mortgage market (purchases and refis) and 40 percent of purchase applications.

Compare that to around 11 percent of the overall market during the last shutdown in 1995. For the nation's big public home builders, it's far more of an impact, according to analysts.

RELATED: Foreclosures on the rise: Is your city on the Top 10 list?

FHA Share of Borrowers:

  • KB Home: 62 percent
  • Ryland: 65 percent
  • Pulte: 38 percent
  • Hovnanian: 49 percent

"We have been alerted that FHA will maintain the ability for lenders to secure case numbers – one of the first steps in originating a FHA mortgage – and underwriting will not be impacted either. However, lenders will be challenged to close these loans during a government shutdown as they will not be able to secure mortgage insurance," says Bob Walters, chief economist at Quicken Loans.

No FHA, which is really the only low down payment (3.5 percent) game in town for the somewhat less credit-worthy, would hit first time buyers particularly hard:

"If first time buyers cannot get financing, then they cannot buy homes from those looking to move into bigger homes. That means this is a cascading effect that could hurt the banks and mortgage insurers," writes Jaret Seiberg at MF Global.

Are we all over reacting? I mean, a government shutdown wouldn't last very long, right? Probably not, but the impact on home buyer confidence, which is on life support as it is, could be longer term.

"An FHA shutdown would likely be most worrisome from a psychological perspective, as it would reduce buyer confidence," notes Credit Suisse's Dan Oppenheim.

"We see in effect now just a lack of confidence, and that's not what we need right now," adds Bill Soteroff, EVP at REMAX.

RELATED: Foreclosures on the rise: Is your city on the Top 10 list?

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